UBS Follows Up Lukewarm Q1 Results With Proposal For A New Global Structure
Swiss banking giant UBS‘s (NYSE:UBS) first quarter results were not particularly strong, but investors will be happy with the restructuring plan it detailed along with the Q1 results. [1] UBS is looking to revamp its current structure by forming a group holding company that will encompass individually capitalized banking units in Switzerland, the U.K. and the U.S. As the new structure will compartmentalize the impact of adverse economic conditions in any region on the bank’s global operations, UBS expects to qualify for a capital rebate under the Swiss regulatory laws – allowing it to free enough capital to pay investors a one-time dividend of CHF 0.25 ($0.28) per share later this year. The banking group is expected to start the restructuring process this quarter after getting necessary clearances from Swiss regulators.
Operationally, the difference in UBS’s revenues for Q1 2014 compared to Q4 2013 and the first quarter of 2013 can be attributed largely to fluctuating trading revenues, as revenues for its wealth management and retail banking units remained around similar levels. The bank did well on several fronts, however, as it reported its lowest operating expense figure since Q2 2012, added CHF 22.4 billion (~$25.5 billion) in net new assets across its wealth & asset management businesses and continued to strengthen its balance sheet with a fully applied Tier-1 common capital ratio of 13.4% – consolidating its positions as the best-capitalized bank among all global systemically important financial institutions.
In view of the restructuring plan and the dividend that the bank is set to pay out to investors this year, we increased our price estimate for UBS’s stock slightly from $21 to $21.50, which is slightly ahead of the current market price.
See our complete analysis of UBS here
Investment Banking Division Unable To Match Last Year’s Performance
UBS made drastic changes to its investment banking operations in recent years by announcing plans to reduce its fixed-income trading business to a fraction of its former size by slashing roughly 10,000 jobs. The impact of this on UBS’s business model can be seen from the chart above, which shows that equities trading contributes about 17% of the bank’s share value compared to less than 4% by the fixed-income trading desk.
The move, however, put the onus of driving the top line squarely on the bank’s equities desk, which actually lived up to expectations over the first two quarters of 2013, generating CHF 2.3 billion (~$2.5 billion) in revenues for H1 2013. But these revenues fell sequentially over the last two quarters of 2013 to bring in just CHF 1.7 billion (~$1.9 billion) over H2 2013. There has been a noticeable improvement in trading revenues for Q1 2014, with the bank’s equities unit roping in a little over CHF 1 billion (~$1.2 billion) in revenues this time around. This is 11% below the figure for Q1 2013, although sequentially this represents a 21% improvement.
The restructured fixed income business also witnessed a revenue dip – a trend seen across the banking sector in Q1. The debt trading operations made CHF 382 million (~$440 million) in revenues this quarter which is almost 40% below what it reported for the same period last year. The impact of reduced trading revenues on the bank’s top line was exacerbated by a notable decline in advisory & underwriting revenues for the quarter, which fell 23% compared to the level seen in Q1 2013, resulting in an overall 21% decline in investment banking revenues year-on-year.
Wealth Management Continues To Deliver
UBS’s revamped business model hinges substantially on its global wealth management business, and the unit did quite well in the first quarter. The wealth management operations in Americas did a particularly well, reporting a record pre-tax income figure of $272 million in Q1 – 30% higher than the figure for the same period last year and 7% more than what it reported for the previous quarter. Although the prolonged low interest-rate environment in the U.S. hit interest incomes for the division, the increase in assets under management from $970 billion in Q4 2013 to $987 billion helped mitigate the impact by boosting fee income for the period. The bottom line benefited further from the impact of improving credit conditions and slightly lower operating expenses – resulting in the record Q1 performance.
See More at Trefis | View Interactive Institutional Research (Powered by Trefis) | Get Trefis Technology
Notes:- UBS’s first-quarter 2014 results, UBS Press Releases, May 6 2014 [↩]